Accounting for Factorless Income

Brent Neiman

March 2018 | Federal Reserve Bank of Minneapolis Working Paper 749

Comparing U.S. GDP to the sum of measured payments to labor and imputed rental payments to capital results in a large and volatile residual or “factorless income”. Interpreting factorless income as economic profits implies a tight negative relationship between common measures of the real interest rate and markups, leads to large fluctuations in inferred factor-augmenting technologies, and results in markup levels that have risen since the early 1980s but that remain lower today than in the 1960s and 1970s. Alternatively, unmeasured capital plausibly accounts for all factorless income in recent decades, but its value in the 1960s would have to be even larger than the sum of non-residential and residential capital. Attributing factorless income to deviations of the rental rate of capital from standard measures based on bond returns leads to an inference of more stable factor shares and technological growth, but requires an explanation for why these cost of capital deviations exhibit trends. Using a multi-sector model with multiple types of capital, we demonstrate that our assessment of the drivers of changes in output, factor shares, and inequality between representative workers and capitalists depends critically on the strategy chosen to allocate factorless income.

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